Gifts with reservation of benefit
Gifting your assets during your lifetime can make sure that more of your wealth passes to your loved ones. However, the gifts can still be subject to inheritance tax on your death.
Gifting can have two important benefits when it comes to passing on wealth. Firstly, you can make sure that treasured possessions go to exactly who you want them to, removing the risk of the gift being challenged when your Will is read.
Secondly, if you survive the gift by seven years, it will pass free of inheritance tax (IHT), as long as you comply with gifts with reservation of benefit (GROB) rules.
The GROB rules are designed to prevent tax payers ‘having their cake and eating it’ by making lifetime gifts whilst continuing to receive some, or all, of the benefits of the gifted item.
Property that the donor continues to live in is the most common example of this, but chattels (items of tangible personal property such as art, jewellery or furniture) are also affected.
So if you are thinking of passing on a family heirloom, here are some things to consider:
Gifts with reservation of benefit – what’s involved?
When an individual makes a gift of a chattel, there is no immediate charge to IHT when the gift is made. Providing the gift is made without conditions and the donor does not retain possession or continue to enjoy the asset, it should remain IHT free if the donor survives the gift by seven years.
The gift can also be subject to Capital Gains Tax (CGT), however each individual is entitled to an annual exemption of £11,300 per annum.
It may not always be straightforward to steer clear of the GROB rules. Take for example, the following scenario.
Example: Jane gifts the legal interest of a valuable painting to her daughter Sarah on the 26th July 2016. Sarah does not have the space in her home to store the painting so it remains in Jane’s home until Sarah moves house in September 2020.
Jane dies on 6 April 2026 – ten years after the transfer of legal interest. Because of the GROB rules she is treated as making a PET in September 2020, therefore not surviving the 7 years from the effective date. The painting therefore remains as part of Jane’s estate and subject to inheritance tax.
Calculating the best option
Passing on valuable items or heirlooms to a younger generation may play a significant part in IHT plans. However, navigating the minefield of GROB may be a more difficult task that may attract additional scrutiny from HMRC.
It is important to carefully weigh up the options to calculate the most cost effective option for your personal situation.
For advice on effective inheritance tax planning please contact Paula Jeffs